1MDB's Default Leaves Bonds of Abu Dhabi Guarantor Fund Unmoved

  • IPIC's 2022 notes little changed at 4:34 p.m. in London
  • Moody's: Default by 1MDB does not constitute default by IPIC

A debt default by 1Malaysia Development Bhd. failed to ruffle investors in the Abu Dhabi state fund that is a co-guarantor of the unpaid bonds.

International Petroleum Investment Co.’s own $1.5 billion of securities maturing 2022 were little changed after Kuala Lumpur-based 1MDB defaulted on a $50 million interest payment it says IPIC should pay.

The lack of movement underscores how the financial turbulence of Malaysia’s state-owned firm has had a limited impact in the Middle East. The default is the latest episode to rock 1MDB, already a target of global investigations into allegations of money laundering and embezzlement. 1MDB has consistently denied wrongdoing.

“There’s no cross default from that bond to IPIC if only 1MDB defaults, so the contagion risk is absent as long as IPIC fulfills its payment obligations as a guarantor,” said Rehan Akbar, a Dubai-based analyst at Moody’s Investors Service. “Investors who are familiar with the government of Abu Dhabi and its key state-owned enterprises understand that the willingness and capacity to honor contractual obligations by these entities isn’t in question as a result of the 1MDB situation."

The yield on IPIC’s 2022 securities, which rose Monday as Abu Dhabi sold its first sovereign debt in seven years, climbed less than one basis point to 3.11 percent as of 4:34 p.m. in London.

Abu Dhabi Sale

IPIC said Monday it will pay bondholders of Malaysia’s troubled investment company should the latter fail to pay the interest payment on a $1.75 billion bond. 1MDB said on Tuesday it’s in default on the 2022 debt.

1MDB has been locked in a dispute over its obligations to IPIC under an agreement reached in May last year. As part of the pact, the Abu Dhabi wealth fund said it would assume obligations to pay interest due under $3.5 billion of 1MDB bonds that it guaranteed. IPIC said this month that 1MDB was in default of the agreement after the Malaysian fund failed to pay it more than $1 billion in connection with a loan.

Abu Dhabi, holder of about 6 percent of the world’s oil reserves, raised $5 billion Monday as it seeks funds to plug a budget deficit left by the plunge in crude prices. The emirate, capital of the United Arab Emirates, raised $2.5 billion from five-year notes priced at 85 basis points more than similar-maturity U.S. Treasuries, and an identical amount from 10-year bonds at 125 basis points over Treasuries.

The default is “not going to have a huge impact” for IPIC, said Abdul K Hussain, the chief executive officer of Mashreq Capital DIFC Ltd. in Dubai. “You had a very successful Abu Dhabi issue at very attractive spreads yesterday, and that just shows that the market is still receptive to the overall complex of the credit.”

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